We realised that the most effective investment pitches all start with the same two words…
Sometimes I hear founders complain that it’s difficult to get the attention of potential investors. They fall into the trap of busking for small amounts of capital in rooms full of people, many of whom are spectators and unlikely investors. The truth is it’s shockingly easy to get the attention of potential investors, especially in New Zealand where nobody is more than one or two degrees of separation away and people are generally happy to help. The key is to have genuine questions. Rather than boasting about things that are already amazing, drill in on the things that are not solved yet. Being specific about how capital will help is so rare that doing so immediately makes you stand out from the crowd.
As a potential investor, there are four questions I always start with when talking to a founder about their venture:
I’m always interested in which of these questions is most difficult to answer. Sometimes there is no customer in mind. Sometimes there is no obvious way to sell. Sometimes there is no unique insight. And more often than you would expect there is no real deep motivation, other than wanting to be a founder and have a startup. Those are all easy red flags.
Of course, the ultimate question potential investors should have in mind when considering a startup is always “how will you eventually make money?” But if there are good answers to each of these four questions, then I’ve found that will mostly take care of itself.
I like to pay attention to how founders pitch their company to potential investors.
Engineers and designers usually start their pitch by demonstrating a solution. They describe what they’ve built or hope to build, particularly when that involves genuine innovation or invention. They nearly always assume that the product will sell itself.
Sales people usually start by describing the problem, and their vision for how that problem might be solved. They nearly always assume that the product will build itself.
Finance people typically start their pitch with numbers. They nearly always assume that the funding is the hard part.1
The majority of pitches follow a well-worn format that became widely adopted some years ago: they start by describing the problem and proposed solution, then progress to analysis of the market size, business model and competitive advantages.2
However, after hearing a lot of them, I’ve realised the most compelling pitches take a very different approach. They always start with the insights gained from the experiments completed so far. The most valuable insights typically combine a lesson learned from experience with a proposed next step. They are small, actionable units of truth.3 So, I always look out for pitches that start with these two simple words: “We realised…”
Leading with insights allows us to explain how our understanding of the problem and the solution we are working on have evolved over time, and can continue to improve, rather than requiring us to pretend that we already have the answers. It avoids the common deceit of needing to present a solid and unchanging vision for the future.
To solve a problem we need to experiment. If we haven’t completed any experiments yet, and so don’t have any useful insights to share, that’s a sign that we’re probably not ready to pitch for investment.
Here is a simple pitch deck template you can use, if you want to try this approach: 4
Use a large font and as few words as possible. Avoid the temptation to fall into a full product demo.
One technique to find these words is: Ask somebody to describe the idea to a third person. Then listen carefully to the words they use and steal those. This will literally use a different part of your brain.5
Remember, if we’re hoping to grow via word-of-mouth this is exactly how the idea will spread!
It’s most common to describe the competition using a quadrant diagram. This is rarely useful because we can always choose two dimensions which are flattering. So extract the key ideas from this and describe succinctly why customers are currently choosing the competing products and why we believe they will switch their preferences.
A useful format for this is:
Unlike [primary competitor] our product [description of key differences]
It’s common to include customer quotes in a pitch, but I’ve never seen one that wasn’t positive, so these tend to be ignored. It’s better to tell the story with numbers rather than words - i.e. tell us what people do vs. what they say they will do.
Use a summary slide + extra slides to expand on each point.
Be careful to only estimate as far ahead as we reasonably can, given the stage we are at. It’s tempting to pretend this is further than it actually is.
Include revenue and expense forecasts that cover the same time period as the unit of progress.
When we have metrics that demonstrate momentum and market validation then it’s tempting to just share those and let potential investors extrapolate. The great thing about results, even if they are very early or building on a small base, is that they stick in the mind of the person receiving the pitch much more effectively than promises. But facts can also easily ruin a great story, so we need to make sure all of the numbers are good, or at least be prepared to explain those that are not. ↩︎
Writing a business plan, Sequoia Capital. ↩︎
This succinct summary is from entrepreneur and venture capitalist Kunal Shah:
Core Human Motivations, Knowledge Project Podcast, Episode 141. ↩︎
I call this the “Melodics Format”, because the first time I encountered the important aspects of it was in the initial pitch we got from Sam Gribben, who is the founder at Melodics. ↩︎
Watching With Intent To Repeat Ignites Key Learning Area Of Brain, Science Daily, December 2006. ↩︎
Leap of Faith
Don’t confuse risk with uncertainty - be clear about what we know is true and what we hope might be true.
Unit of Progress
Be specific: Where are we going and what will it take to get there?
Startup Theatre
To encourage more people to work on startups, we often try to make them fun. How does that hurt?